At the time of Sale of any Asset, Tax is liable to be paid on the Gains earned on the sale of Asset.
- Such Gains could either be Short Term Capital Gains or
- Long Term Capital Gains.
The basis of such Classification in the Income Tax Return has been given below:
1. Short Term Capital Gain (STCG): If the Asset is held for less than 36 Months*
2. Long Term Capital Gain (LTCG): If the Asset is held for more than 36 Months*
*The classification of short term & long term capital gains and their tax rates is different in case of Shares and Mutual Funds.
This article focusses on computation of capital gains for all assets except Shares and Mutual Funds.
For computation of capital gains on sale of shares and mutual funds refer the following article.
Read: Capital Gains Tax on sale of Shares and Mutual Funds Capital Gain Tax Rate for all Assets except Shares and Mutual Funds Short Term Capital Gain Tax Rate:
As per normal Income Tax Slabs Long Term Capital Gain Tax Rate: 20% Computation of Short Term Capital Gain Gains arising at the time of sale of Short Term Capital Asset shall be computed in the following manner:
Buying a property and selling it at a higher price later is very common. Since, most investors sell their property at a profit, every profitable sales transaction attracts a certain tax liability. The tax rate however depends on several factors. As the amount involved in sale/purchase of a property is usually very high, the resultant tax amount is also very high! So to reduce the tax burden for investors, the Government of India has laid down several alternatives for availing tax exemption under the Income Tax Act.
Before computing the net tax liability and investing your funds in the right avenues to save tax, it is first important to understand the classification of your gains arising from the sale of a property.
A property held for 3 years or less, attracts Short-Term Capital Gain (STCG), when sold at a profit. The gain from this sales transaction is added to the tax payer’s income and taxed as per the income tax bracket he falls under.
For instance, if a tax payer falls under the tax slab of 30 percent, the STCG will also be taxed at the rate of 30 percent. The tax on STCG however, is not eligible for any type of exemption.
The tax payer is liable to pay Long Term Capital Gain (LTCG) if he holds a property for more than 3 years before selling. Since the LTCGs are usually very large, there are several provisions available to reduce the tax burden arising from these transactions.
Some of these are indexation, lesser tax rate and deductions available as per income tax act. To reduce the tax burden, indexation factors inflation in its calculation by using the Cost Inflation Index. The tax rate of 20 percent on LTCG brings down the amount of tax payable significantly as compared to the STCG tax (where STCG is 30%). Apart from this, there are several exemptions/ deductions available to reduce the LTCG tax burden of the assessee. These deductions are available in the following circumstances:
a) LTCG arising due to sale of a residential unit and investment made in a new residential unit;
b) LTCG arising due to sale of an agricultural land and investment made in a new agricultural land;
c) LTCG arising on compulsory acquisition of lands and buildings of an industrial undertaking and investment made for purchase of land or building to shift or re-establish the industrial undertaking;
d) LTCG arising from transfer of machinery or plant or building or land of an industrial undertaking situated in an urban area and an investment made on machinery or plant or building or land for the purpose of shifting the industrial undertaking to any area other than urban area;
e) LTCG arising on sale of asset other than a residential unit and investment made in a residential unit;
f) Investment in financial assets;
g) Investment in equity shares.
You can avoid paying LTCG tax partially or completely if you invest your funds wisely. The Income Tax Act allows several exemptions for saving your LTCG tax liability. It is important for an investor to be aware of these exemptions to lessen his tax burden. Following are some of the popular ways to save Long Term Capital Gain tax:
1. Investment in residential property within a specific time frame (Section 54/ 54F):
As per the income tax provisions, LTCG arising from sale of a capital asset (residential or non-residential property) is exempt under Section 54/54F if the net sale proceeds are invested in purchase or construction of one residential property, subject to following conditions:
Condition (i): The investor/seller should use the funds from capital gain to purchase a new residential house within 1 year before or 2 years after the transfer date (sale/transfer of the original property).
Condition (ii): If the investor intends to invest his money in an under-construction residential property or construct his own residential property, the construction needs to be completed within 3 years from the date of transfer of the original property.
Condition (iii): The investor should not own more than one house (other than the new house) on the date of sale or purchase. Or, should not construct any residential house (other than the new house) within a period of three years, after the sale date.
Condition (iv): The investment in a new residential property has a lock-in period of three years. If the new property is sold within a period of three years, the exemption claimed with respect to the old property shall be revoked and the capital gains become taxable.
Condition (v): If the amount invested for buying a new house is more than the capital gain, then the maximum amount of tax exemption should be restricted to proceeds from LTCG invested for buying a new house. In other words, maximum exemption cannot exceed the amount of LTCG used for buying a new house. The balance amount of LTCG (after investing in new property), if any, is taxable at 20%.
Condition (vi): As per union budget for FY 2014-15, for availing the benefit of LTCG tax exemption, the investment should be made only in one residential house property situated in India, not abroad.
2. Deposit funds in Capital Gains Account Scheme (CGAS):
To avail tax benefit, the capital gains should be re-invested in a residential property before filing income tax return for that year. If you are unable to find the right property or invest that money in another property before the due date (usually 31st July) of filing your tax return, then the unutilized sale proceeds can be deposited into Capital Gains Account Scheme (CGAS). Taxpayers can avail exemptions under the CGAS only when the amount of capital gain, or net consideration, is deposited by the last date for filing the income tax return.
There are 2 categories of Capital Gains Account:-
Deposit Account Type A: All deposits into this account are in the form of savings. This account is suitable for taxpayers who want to construct a house over a long period as withdrawals are permitted according to the provisions of the scheme.
Deposit Account Type B: This account is similar to a term deposit as it is payable after a fixed time duration. The depositor can opt to keep the deposits cumulative or non-cumulative and withdrawals from this account can be made only after a stipulated duration.
The Capital Gains Account however, is only a temporary arrangement to park your funds for 2-3 years. The withdrawals from these accounts should be made to pay for purchasing/constructing a residential property only.
3. Investment in bonds (Section 54 EC):
LTCG arising from the transfer of any long term capital asset are exempt under section 54EC if the investor, within a period of 6 months of sale, invests the capital gain in notified bonds issued by the National Highways Authority of India (NHAI) or Rural Electric Corp. (REC) Ltd for a minimum period of 3 years. This is restricted to a cap of Rs.50 lacs per financial year. These bonds are also known as capital gain bonds.
An investor who wishes to claim the exemption from LTCG tax has to invest the amount in the capital gain bonds within 6 months from the date of sale (of property) or before the due date of filing income tax return (usually 31st July), whichever is earlier.
The interest rate offered on above mentioned bonds is currently 6% and the interest income from these bonds is not tax-free.
Tax treatment for Capital gains is different from regular income. It is important for an investor to be aware of its computation and the availability of various options to save his/her tax liability.